The Democrat Tax Increase Proposal

Yesterday, the House Ways and Means Committee (‘House Democrats’) circulated their proposed tax plan. There are substantial raises in the tax rates, including increasing the tax rates on corporations, investors, and high-income business owners.

The objective is to raise money to fund the Democrats’ domestic investment plan with expenses over $3.5 trillion, including expanded social services and attacking climate change. According to the document released among panel members, House Democrats will debate a 10-year increase in revenue to finance the new spending.

A few of the critical points in the House Democrats’ proposed tax plan:

Long-Term Capital Gains Tax

The proposal would increase the capital gains tax rate for those with an income above $400,000 to 25% from the current 20% and include an additional 3% surcharge on taxable income over $5 million. Today, the federal tax rate on corporations is 21%, down from the 35% rate that was in effect before the 2017 Republican tax restructuring.

Top Marginal Income Tax Rate

The proposed plan would raise the top individual tax rate to 39.6% from 37% on taxable income above $400,000 for individuals and $450,000 for married couples starting in 2022. The 3%-point surtax would apply to individuals and married couples with adjusted gross income above $5 million.

The value of estates tax-protected from property taxation, which was $24 million for married couples under the Republican tax cuts of 2017, would return to $12 million at the end of 2021, instead of 2025 as the scheduled expiration date.

Corporate Tax Rates

The proposal circulating seeks to establish a graduated corporate tax rate of 18% on annual income up to $400,000, 21% on income up to $5 million, and 26.5% on income above $5 million. Republicans cut the corporate tax rate from 35% to the current 21% in 2017.

Pass-through corporations, which do not pay the corporate tax but instead pay taxes on their owners’ returns, would be affected in many ways. Taxpayers earning over $400,000 would face higher marginal tax rates due to eliminating the deduction between $400,000 and $500,000 in income, which would discourage pass-through investment. Those corporations would also no longer avoid paying a 3.8% tax on their active business income.

Minimum Tax on Foreign Income

House Democrats also are considering raising the minimum tax on foreign corporations’ income to 16.5% from 10.5% and increasing the top capital-gains tax rate to 28.8% from 23.8%. Here, companies could use more of their foreign tax credits, mitigating the knock of this higher minimum tax and excluding an amount equal to 5% of their tangible foreign assets from that minimum tax. The minimum tax would be calculated for each foreign country, as proposed.

The House Democrats scheduled work sessions for this week, Tuesday, and Wednesday, to debate tax policies and other matters under its jurisdiction to be included in the $3.5 trillion “reconciliation” bill, which would require a simple majority to be passed in the Senate. The final version of the bill would be tailored to win the support of moderate Democrats in the Senate, where Democrats have 50 of the 100 seats.

The team at Evolution Tax and Legal will keep a close eye on the results of these new conversations since a more moderate approach should be pursued for the Democrats to see the bill becoming a law. Wondering how these changes will affect you or your business? Contact the team at Evolution Tax and Legal to get our help in navigating these changes in taxation.

September 15, 2021

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